Financial Pain

01.11.1312:25 PM ET

American Express Charges Backward, Laying Off 5,400

The company is shedding 5,400 of its 63,500 employees and taking a number of charges that will halve its quarterly profits. But the real blow is its outmoded consumer and business travel business, says Daniel Gross.

“We’ve been working on this change. I’ve talked about the convergence of online and offline. We have implemented actions to be able to operate more effectively in the digital marketplace.” A media executive speaking prepared notes for Davos? A big-box retailer holding forth at the Consumer Electronics Show? No, that was Kenneth Chenault, CEO of American Express, speaking in a conference call Thursday night in which the financial-services giant announced it would lay off 5,400 people and take a series of charges that would halve its quarterly profits.

Headquartered in the World Financial Center, American Express has blanketed the globe and segmented the market—gold, platinum, centurion. In the process, it has become a brand for the 1 percent and its many aspirants. Chenault, having run the firm since 2001, enjoys one of the longest tenures of any big New York financial firm. Virtually alone among the city’s financial bigwigs, his reputation is of such quality that his name was seriously floated for Treasury secretary.

American Express makes money by facilitating and processing all sorts of retail transactions, by lending money to its customers, and by helping people and companies arrange travel. The core business is doing quite well. Card spending was up 8 percent in the most recent quarter, and customers are doing a much better job keeping up with their payments. “The write-off rate of the U.S. lending portfolio (principal only) was 2.0 percent for the quarter,” the company reported.

While AmEx’s card business benefited from one of the big business-friendly trends of 2012, the improving consumer, the company was hurt by some of the year’s other big trends: tougher regulation and the relentless disintermediation of established business models by the digital revolution.

AmEx announced Thursday that its earnings would be impaired by three major charges. The first, $342 million, was done to account for a slight uptick in participants cashing in their points in its Membership Rewards program, in which card users accrue points redeemable for travel and other rewards based on spending. Given that Membership Rewards points are a liability for American Express—they have a cash value to customers and will be used at some point—the fact that more will be redeemed in 2013 rather than 2014 is more of an accounting issue than a fundamental business one.

A second charge can be directly ascribed to Washington forcing financial firms to change their behavior. AmEx is reporting a charge for $153 million to account for money it will have to return to card members. “This amount deals with fees, interest and bonus rewards as well as an incremental expense related to the consent orders entered into with regulators last October,” the company said. Translation: the Consumer Financial Protection Bureau, the creation of Sen. Elizabeth Warren (D-Mass.), last year nailed American Express for a host of violations.

“This action is the result of a multipart federal investigation which found that at every stage of the consumer experience, from marketing to enrollment to payment to debt collection, American Express violated consumer protection laws,” the CFPB said. The litany of accusations included levying illegal late fees and wrongly charging late fees. American Express had agreed to refund at least $85 million to some 250,000 consumers and pay a penalty of $27.5 million. The sum the company announced yesterday is the result of its own accounting for customers it had wronged.

That’s a black eye for the company. But it wasn’t the cause for the layoffs or the biggest charge. The company announced it will take a $400 million restructuring charge and fire 5,400 of its 63,500 employees to adapt to a future in which “more customers transact online or through mobile channels.”

After falling sharply in 2008 and 2009, the consumer and business travel sectors have bounced back rapidly, but not in ways that cater to the strengths of American Express. Consumers, even the well-off consumers who used to patronize American Express, are now much more likely to book travel on their own through Orbitz, Kayak, Expedia, Priceline, or through a hotel website. And why shouldn’t they? Booking online allows people to plan on their own terms and easily search for different options. These sites are also frequently more functional than American Express’s human-machine hybrid. A recent effort to book international travel through American Express, a transaction that would have taken a few minutes on Kayak or Expedia or on the airline’s website, wound up taking nearly an hour of failed website transactions and customer-service phone calls.

“As all of these processes become automated, American Express and many other agencies have less need for physical staff to issue tickets.”

Kenneth Chenault, chairman and CEO of American Express. (Brian Ach/AP for American Express))

A large part of the company’s business revolves around managing travel for large companies. And that’s where American Express is really suffering. “The economics of particularly the business travel business have changed more dramatically than any part of our business,” Chenault told investors on Thursday. When I arrived at Newsweek in 2007, there was a three-person team of American Express employees who sat in our offices and managed travel for editors and reporters. That model is now outmoded.

“Their primary business in travel is servicing corporate travelers through agencies and call centers,” said Douglas Quinby, senior director for research at PhoCusWright, a New York–based consulting firm. But that business is evolving from a booking service into something more like management consulting, in which firms negotiate deals, help manage travel procurement, and design software that integrate travel booking with expense systems. “As all of these processes become automated, American Express and many other agencies have less need for physical staff to issue tickets,” Quinby said.

Online travel companies like Expedia have rolled out tools aimed at corporate users that allow them to manage programs. Employers, in turn, are pushing employees to manage their own travel online rather than pick up the phone. At many companies, a new generation of managers and employers have grown up making their own travel arrangements. Indeed, many business travelers prefer to book their business travel through the leisure platforms they use in their personal life, such as Travelocity or Priceline. It’s no surprise that everybody involved in the travel industry—airlines, hotel companies, online travel agencies, and corporations—is eager to do more of the work electronically, via computer, tablet, or mobile phone. It’s just more efficient and cheaper.

In retailing and publishing, the digital natives often have a cost advantage over the clicks-and-mortar crowd, the pre-Internet firms that combine digital commerce with the old-fashioned type of commerce that involves human interaction. The same holds in business travel.